Some food for thought
"The test of a first-rate intelligence is the ability to
hold two opposed ideas in mind at the same time and still retain the ability to
function."
—F. Scott Fitzgerald (American Author, 1896-1940)
Word for the day
Sibilate (v)
To hiss
First random thought this morning
Election season is approaching fast. Beginning with the assembly
elections in five states (MP, Rajasthan Chhattisgarh, Mizoram, Telangana) the
season shall last for about 7-8months, till a government is formed at the
center post general election next year.
I find that it is almost impossible to avoid discussion on politics
these days. For one, due to weakness in markets (Financial as well as Real)
most people are looking for distractions and nothing is better than politics in
these times. Two, political narrative has become very interesting these days,
as most parties and groups appear to be in a state of flux. The positioning is
changing and so is the strategy.
Going way out of their conventional strategies, BJP appears to
be taking the route of minority & SC/ST appeasement. Congress is wooing
Hindus and urban middle classes.
To gain some deeper understanding of the present political
environment, I spoke to about 100 non RSS BJP supporters coming from various
walks of life. I asked them why they would support BJP in next general
elections. The answers were as follows:
(a) TINA
(b) Modi deserves
another chance. We made a mistake by not giving ABV a second chance.
(c) BJP has forced
all parties to care about the feelings and interests of Hindus.
(d) Congress needs to
be stopped at all costs.
(e) What if Mayawati
or Mulayam Singh become prime minister.
No one mentioned any governance issue for their support. Next I
shall be speaking to Congress and Mayawati supporters.
Chart of the Day
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In the end, earnings' disappointment will only drag the market
The markets are perceptibly jittery. In past five years there
have been many instances of major correction in the markets. But this does not
look like any of those. The price erosion in a large number of stocks, across
sectors and market segments, has been deep and sharp. To many it might be
reminiscent of the post Lehman meltdown of 2008.
Before I go any further, I would like to make it clear that it
is still not too late to make necessary corrections in asset allocation, if
someone had been protracting it out of sheer greed or plain lethargy.
In fact, I had been anticipating this for many months now. The
market from last week of March had been rather counterintuitive to me.
Notwithstanding with the rhetoric on global trade war, fear of
political instability, liquidity crisis etc., I have been maintaining that
other things apart it will be the earnings that will disappoint the markets
most. Believing my personal observations made during my travels, I never placed
much reliance on the optimistic earnings growth assumptions made by analysts.
Unfortunately, my fears of earnings disappointment appear to be coming true.
The key premise behind my crude calculations is that the popular
analysis is ignoring the structural change in the cost curve of businesses that
may lead to persistently lower margins. Costs of resources, compliance, and
capital are rising structurally in India. The businesses that have been built
upon state patronage, corruption and contempt for compliance norms, shall
continue to suffer the deepest pain.
Since the current episode of market panic is driven by the
liquidity concerns and anticipated rise in cost of funding, due to rising
policy rates locally as well as globally, it would be interesting to analyze
the data on Indian corporate indebtedness, finance costs and sensitivity of
earnings to interest rates.
I am presenting a sample of data drawn from of all companies (ex
financials and banks) listed on NSE having a market cap of over Rs200cr. The
date is presented without any comments. Readers may draw their own references
or connect with their respective financial advisors to understand the full
implications.
I have considered
it appropriate to highlight "total debt" and not "net
debt", because (a) I believe that the companies which are not in the
business of finance and have material debt on their books, must be keeping cash
in hand because they need it for the business, not because they enjoy holding
cash; and (b) there have been many cases in past where the "cash in
hand" has been discovered to be only "cash in books of account".
There are many
companies where the amount of annual interest expense (net of interest earned)
is more than the post tax profit. As interest rates are rising, the earnings
downgrade in these companies could be sharper. For a company with present
average funding cost of 7%, a 150bps rise in funding cost may result into 20%
hike in interest payable (assuming debt remains stable).
The following is
an illustrative list of companies where the absolute amount of debt is
substantial and interest expense is more than the PAT.
There are many
companies whose enterprise value is mostly represented by debt. The market
price of the stock of many such companies show a strong correlation with the
rise in interest cost and/or the amount of debt. An illustrative list of few
such companies is given below.
Disclaimer: While
care has been taken to take and present correct data, but it is entirely
possible that some mistakes might have occurred. The entire responsibility for
any such mistake lies at my door, and I would sincerely regret that.
